Pound Sterling plunges as hot US Inflation dampens market sentiment

The Pound Sterling dips below 1.2600 on surprisingly sticky US inflation data for March.
The UK monthly GDP data for February will provide fresh cues about the economy’s performance.
The UK’s rising cost-of-living crisis supports BoE rate cut prospects.

The Pound Sterling (GBP) weakens against the US Dollar in Wednesday’s early American session as the United States Consumer Price Index (CPI) data for March remains stubbornly higher. Economists anticipated the US inflation to remain relatively high in March due to increasing Oil prices, insurance costs and rentals. Hot price pressures would shift market expectations of Federal Reserve (Fed) rate cuts to the third quarter of this year.

On the domestic front, the Pound Sterling will be guided by the United Kingdom’s monthly Gross Domestic Product (GDP) and the factory data for February, which will be published on Friday.

The GDP data will give a snapshot of the economy’s state. The factory data represents the country’s manufacturing sector, a leading indicator of overall demand. Weak numbers would boost expectations for Bank of England (BoE) early rate cuts, while better-than-expected data will indicate that the economy is returning to recovery.

Daily digest market movers: Pound Sterling weakens while US Dollar rallies

The Pound Sterling delivers a vertical downside move after facing selling pressure near the round-level resistance of 1.2700. Surprisingly hot United States consumer price inflation data for March has dented appeal for risk-sensitive assets. The S&P 500 is down by almost 1%.
The annual headline inflation grew strongly by 3.5% from the consensus of 3.4% and the prior reading of 3.2%. Core inflation, which strips off volatile food and energy prices, rose steadily by 3.8% in the same period. On a monthly basis, both headline and core CPI increased steadily by 0.4%. Investors anticipated them to have grown at a slower pace of 0.3%.
This would allow Federal Reserve (Fed) policymakers to delay rate cuts. The March CPI data suggest that a victory over inflation is not in sight. For inflation to return to the desired target of 2%, the monthly CPI needs to increase at a steady pace of 0.17% for the entire year.
The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, soars to 105.00.
On the United Kingdom front, the rising burden of the higher cost of living on households has prompted demand for rate cuts by the Bank of England. The latest survey by the Financial Conduct Authority (FCA) showed that individuals struggled to pay bills, and credit repayments fell in January annually. The agency estimated that 7.4 million individuals faced problems in addressing their monthly expenses, lower than the 10.9 million recorded in January 2023 but still significantly higher than the 5.8 million recorded in February 2020.
Investors expect the BoE to pivot to rate cuts after the June meeting. The speculation was propelled after Governor Andrew Bailey said market expectations for two or three rate cuts this year are “reasonable.”